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Hero Honda: The ‘Hunk’ among boys - Views on News from Equitymaster

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Hero Honda: The ‘Hunk’ among boys
Apr 24, 2008

Performance summary
  • The company has posted a 4% YoY growth in topline for the full year despite flat volumes

  • Tight control on costs has enabled the company to expand EBITDA margins by 130 basis points, resulting in 15% YoY jump in operating profits

  • Lower other income and higher depreciation charges have restricted the bottomline growth to 13% for the full year on a YoY basis. The company’s earnings have come in 12% higher than our expectations.

  • The company has posted an impressive performance during 4QFY08 as bottomline has surged 53% YoY on the back of a mere 6% YoY jump in topline. Here, EBITDA margins have expanded by 460 basis points

  • The board of the company has recommended a dividend of Rs 19 per share for FY08 (dividend yield of 2.2%).

(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Units sold 855,981 884,075 3.3% 3,336,753 3,337,142 0.0%
Net sales 26,396 27,887 5.6% 99,000 103,318 4.4%
Expenditure 23,709 23,768 0.2% 87,269 89,824 2.9%
Operating profit (EBDITA) 2,687 4,118 53.3% 11,730 13,494 15.0%
EBDITA margin (%) 10.2% 14.8%   11.8% 13.1%  
Other income 445 551 23.9% 1,899 1,854 -2.3%
Interest (net) (77) (81) 5.6% (230) (358) 55.8%
Depreciation 355 435 22.4% 1,398 1,603 14.7%
Profit before tax 2,854 4,316 51.3% 12,461 14,103 13.2%
Tax 904 1,329 47.1% 3,882 4,424 14.0%
Profit after tax/(loss) 1,950 2,987 53.2% 8,579 9,679 12.8%
Net profit margin (%) 7.4% 10.7%   8.7% 9.4%  
No. of shares (m) 199.7 199.7   199.7 199.7  
Diluted earnings per share (Rs)*       43.0 48.5  
Price to earnings ratio (x)**         16.1  
Price to earnings ratio (x)**
(* annualised, ** on trailing twelve months earnings)

What has driven performance in FY08?
  • Despite flat volume growth for the full year, topline growth in value terms has come in at 4% YoY led largely by improved product mix. It has to be remembered that during the year, the company had made few launches in the premium segment of motorcycles that fetch higher realisations and hence, the more than proportionate growth in topline. Furthermore, a flat volume growth in the domestic motorcycle segment is creditable in light of the fact that during the same period, industry sales were down 12% YoY. However, the performance has not come to the company on a platter. It has had a relook at its entire existing product range and has come out in the past 21 months with 14 models in the market, more than the entire products launched in the company’s history.

  • Lack of credit has hampered volumes during FY08, thus pulling down motorcycles sales for the first time in many years. We believe penetration levels in India for motorcycles is still on the lower side and hence, once credit availability improves, sales should resume their northbound journey. Among the company’s other segments, while scooter segment posted a 12% YoY growth, its impact to the overall volumes was minimal on account of its low base.

    sales break up
    Domestic 4QFY07 4QFY08 % change FY07 FY08 % change
    Motorcycles 818,061 830,215 1.5% 3,147,219 3,144,101 -0.1%
    Scooter/scooterette 19,783 23,154 17.0% 91,889 102,470 11.5%
    Total 837,844 853,369 1.9% 3,239,108 3,246,571 0.2%
    Exports            
    Motorcycles 18,081 29,698 64.2% 96,613 88,219 -8.7%
    Scooter/scooterette 56 1,008 1700.0% 1,032 2,352 127.9%
    Total 18,137 30,706 69.3% 97,645 90,571 -7.2%
    Grand total 855,981 884,075 3.3% 3,336,753 3,337,142 0.0%
    Source: SIAM

  • While better product mix helped, it is the big improvement that the company made in controlling its operating costs that helped boost operating profits for the full year. Raw material costs as a percentage of sales came off by 90 basis points (0.9%) and this helped company post a 130 basis point (1.3%) expansion in operating margins. The savings have been even higher in the 4QFY08 where a 180 basis point reduction in raw material costs on a percentage sales basis helped the company expand operating margins by 460 basis points over 4QFY07.

    cost break up
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Raw materials 19,290 19,879 3.0% 71,787 74,025 3.1%
    % sales 73.1% 71.3%   72.5% 71.6%  
    Staff cost 905 988 9.2% 3,538 3,835 8.4%
    % sales 3.4% 3.5%   3.6% 3.7%  
    Other expenditure 3,514 3,064 -12.8% 11,944 11,964 0.2%
    % sales 13.3% 11.0%   12.1% 11.6%  

  • Growth in bottomline at 13% YoY came in slightly lower than the growth in operating profits, due mainly to a 3% drop in other income and 15% rise in depreciation charges. Had it not been for the 56% jump in interest income, bottomline growth could have been even lower.

What to expect?
At the current price of Rs 779, the stock is trading at a multiple of 11.5 times our estimated FY10 cash flow. In an industry where others have struggled to grow profits, the company has once again shown why it will be difficult for competition to dislodge it from the number one position. It should not come as a surprise then that when the situation improves, the company would be the maximum beneficiary of the same. It is raising its capacity to touch a total of 4.4 m units and the new plant at Haridwar will aid it in reaching its targeted capacity. This will enable the company to take advantage of the industry growth story in the medium term. We will come out with revised estimates of the company shortly.

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